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Configurations of Low-Contact Services

Rohit Verma
Cornell University, rv54@cornell.edu

Scott Young
University of Utah

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Configurations of Low-Contact Services

Abstract

This study uses a cluster analysis procedure to develop a classification model of low-contact services based on
seven operations objectives. The effectiveness of the classification scheme is tested by demonstrating the link
between the objectives, competitive priorities, and performance. This study also identifies eight underlying
factors of competitive priorities in low-contact services. Furthermore, discriminant analysis on competitive
priority dimensions shows that low-contact services consist of multiple groups and therefore should not be
lumped into one group in any analysis scheme.
Keywords

operations strategy, service operations, empirical research

Disciplines

Business Administration, Management, and Operations | Entrepreneurial and Small Business Operations
Comments

Required Publisher Statement

Elsevier. DOI: 10.1016/S0272-6963(00)00044-9. Final version published as: Verma, R., & Young, S.
(2000). Configurations of low-contact services. Journal of Operations Management, 18(6), 643-661. Reprinted
with permission. All rights reserved.

This article or chapter is available at The Scholarly Commons: http://scholarship.sha.cornell.edu/articles/569

Configurations of Low-contact Services

Rohit Verma
Department of Management, DePaul University, Chicago, IL 60604, USA

Scott T. Young
David Eccles School of Business, University of Utah, Salt Lake City, UT 84112, USA

This study uses a cluster analysis procedure to develop a classification model of

low-contact services based on seven operations objectives. The effectiveness of the
classification scheme is tested by demonstrating the link between the objectives,
competitive priorities, and performance. This study also identifies eight underlying
factors of competitive priorities in low-contact services. Furthermore, discriminant
analysis on competitive priority dimensions shows that low-contact services consist of
multiple groups and therefore should not be lumped into one group in any analysis
scheme.
Introduction
Services continue to increase in importance as the postindustrial economy evolves in
the developed nations around the world (Chase, 1978, 1981; Schmenner, 1986; Wemmerlov,
1990; Silvestro et al., 1992; Kellogg and Nie, 1995). Both academic and practitioner literature
cite low-contact services as being efficient (similar to assembly lines in manufacturing) and
capable of producing service products at very high productivity levels (e.g. Bowen and
Youngdahl, 1998). Although low-contact services exist in many different industries, e.g.
fastfood, dry cleaning, and automobile repair, the literature often treats them as a single
homogeneous group. Also, most of the low-contact services are assumed to be efficient,
productive and/or profitable. In this paper, we demonstrate that low-contact services are, in
fact, comprised of multiple groups, with different operational objectives, competitive priorities
and performance.
The motivation for our work stems from two streams of research. First, a number of
articles have argued that service management research has moved beyond the primary
classification stage and therefore, it is now necessary to validate the generally accepted
concepts/frameworks (Meredith et al., 1989; Flynn et al., 1990; Swamidass, 1991; Chase, 1996).
For example, recently, Kellogg and Chase (1995) empirically identified the three dimensions of
customer contact: contact time, intimacy, and, information. Similarly, Silvestro et al. (1992)
gathered in-depth data from 11 service organizations and identified firms as people-focused,
people/equipment-focused and equipment-focused. More recently, teams of international

researchers have started collecting large-scale empirical data from senior executives from
service firms in Europe and the Unites States to identify the characteristics of world-class
service firms (Voss and Johnston, 1995; Roth et al., 1997). Along similar lines, our work focuses
on the in-depth analysis of low-contact service operations.
The second motivation for this research comes from a series of recent articles which
argues that in order to effectively compete in a competitive marketplace, service companies
must develop a coherent operations strategy (Vickery et al., 1993, 1997; Ahmad et al., 1996).
For example, Smith and Reece (1999) presented a path analysis model linking service strategy,
fit, productivity and performance for individual branches of a large organization. Our study
demonstrates the linkages between objectives, competitive priorities, and relative performance
within segments of low-contact services.
The rest of the manuscript is divided into the following sections. First, we review the
past research and develop research questions. Next, we describe the research design, present
the results and discuss the findings, and finally, we conclude and provide directions for future
research.
Background and Research Questions
Service Typologies and Taxonomies
This section offers a review of various service classification approaches, as well as a
discussion of their relative strengths and weaknesses. This review is provided in order to
illustrate that while a variety of insightful conceptual typologies have been developed, there is
a need to provide empirical validation in order to identify whether these typologies accurately
model reality, as well as identify any shortcomings. The readers can refer to a recent article by
Bozarth and McDermott (1998) for an overview of manufacturing typologies/taxonomies.
In one of the early classifications, Judd (1964) classified services according to three
categories: rented goods, owned goods and non-goods services. Similarly, Rathmall (1974)
categorized services according to: type of buyer, buyer motives, buying practices, type of seller,
and degree of regulation. Other classification schemes explored the complex nature of service
delivery systems with the goal of identifying differentiating characteristics that affect quality
and process improvement, as well as service design. For example, Shostack (1977) and Sasser et
al. (1978) developed the concept of productservice package based on the tangible vs.
intangible nature of services.
More recent researchers advocated an integrated approach to service management. For
example, Lovelock (1983) classifies services in five different two-by-two matrices and examines
how the specific nature of services in a particular class affects operations and marketing. The
framework of Lovelock (1983) addresses the following: the nature of service act; the type of
relationship between service organization and its customers; customization; the nature of
demand and supply; and service delivery process.

Chase (1978, 1981) proposed that if there is less direct customer contact in the service
system, then the service system is more likely to operate at its peak efficiency. Conversely, the
system is less likely to operate at its peak potential with high direct customer contact. Mersha
(1990) proposed a broadened definition of customer contact and differentiated between active
and passive contact.
Building on the customer contact model of Chase (1978, 1981), Schmenner (1986)
proposed a Service Process Matrix (SPM) based on three characteristics of service delivery
systems: labor intensity, customer contact and service customization. Labor intensity is defined
as the ratio of the labor cost incurred to the value of the plant and equipment. A high labor
intensity business involves relatively small plant and equipment investment relative to a
considerable amount of worker time, effort, and cost. The second dimension in the
classification scheme combines two distinct concepts: customer interaction and customization.
The joint measure has a high value when a service exhibits both a high level of interaction and a
high level of customization for the customers. Schmenner (1986) proposed a two-by-two SPM
that classifies services as service factory, service shop, mass service, and professional service.
Since the publication of Schmenners (1986) SPM, several other service classification
matrices have been developed. For example, Wemmerlov (1990) classified services along three
dimensions: customer contact, rigid vs. fluid service process, and processing of goods,
information or people. Huete and Roth (1988) classified banking services according to delivery
channels. Silvestro et al. (1992) classified services as: professional service, service shop, and
mass services, based on high/low people content and high/low numbers of customers
processed. Kellogg and Nies (1995) SP/SP matrix is based on the nature of service products,
and service processes classify services as expert service, service shop, and service factory.
The classification approaches described above are based on unique attributes of
services such as customer contact, customization, labor intensity, people vs. equipment issues,
etc. Although these publications provide theoretical basis for analyzing different types of
services, they all fail to recognize the differences within service businesses in a specific category
(e.g. low-contact service, service factory, professional service, etc.). For example, according to
SPM (Schmenner, 1986), all airlines, trucking, and hotels are service factories; all hospitals and
repair services are service shops; all retail businesses are mass service; whereas all doctors,
lawyers, accountants and architects are professional service providers. Similarly, according to
the SP/SP matrix (Kellogg and Nie, 1995), all fastfood restaurants are classified as service
factory, all health care clinics as service shop, and all consultings as expert service. Other
service classification approaches (e.g. Lovelock, 1983; Wemmerlov, 1990; Silvestro et al., 1992)
make similar generalizations.
Our research specifically deals with low-contact services. We explore the differences
within two prototype low-contact services fastfood and automobile repair services. We
argue that it is unrealistic to assume that all low-contact services are configured in the similar
manner and that they all emphasize same issues. Developing a finer-grained classification that

can separate different strategies/approaches within larger macrocategories (e.g. low-contact

services) allows more detailed insights and guidance. Therefore, we propose:
Hypothesis 1. Low-contact services are comprised pf multiple groups, each with different
operating characteristics.
Section 2.2 of the paper describes the past research in service strategy, specifically
focusing on operational objectives, competitive priorities, and performance measure.
Operational Objectives, Competitive Priorities and Performance
In one of the early works in operations strategy, Hayes and Wheelwright (1984)
identified four market-based performance measures for manufacturing and service operations.
Cost was identified as the first competitive dimension, but is not the only basis on which a
business can compete. In some businesses, the basis of a competitive advantage is superior
product or service quality. Delivery performance and flexibility were identified as the third and
the fourth competitive dimensions, respectively. The above measures of operational objectives
have been talked about in the operations strategy literature since the early days of the
discipline and therefore require no further explanation. Ferdows and Meyer (1990) developed a
sand cone model and concluded that it is extremely difficult for companies to achieve
excellence in all four objectives at the same time. They recommended a gradual approach
excelling in one competitive objective before attempting to improve the next one. In recent
studies, however, Flynn and Flynn _1999., and Flynn et al. (1999) argue that it is possible for
firms to strategically position themselves in a manner such that several operational objectives
are achieved simultaneously.
According to the production line approach put forth in the early works of Levitt (1972,
1976), cost should be the most important objective for the service factories. In the customer
contact model (Chase, 1978, 1981), it is argued that since low-contact services (i.e. service
factories) are designed to maximize efficiency, the most important operational objective is cost
minimization. Increased competition and the market-driven nature require all services
(including service factories) to constantly upgrade their quality, delivery and flexibility
performance. Hesketts (1987) strategic service vision, Harts (1988) unconditional service
guarantee, and Reichheld and Sassers (1990) zero defections are some of the alternative
approaches for thinking about operational objectives in service factories. In addition, the
service marketing literature emphasizes that operations objectives should include market- and
financial-based measures (Kordupleski et al., 1993; Karmarkar and Pitbladdo, 1995; Rust et al.,
1995). At the same time, it is perhaps not an oversimplification to state that there is no
agreement on how operational objectives should be prioritized in service factories. It is possible
that certain companies only emphasize one or two objectives, while others try to achieve
several objectives at the same time. Based on the above ideas, we develop the following
research hypothesis:

Hypothesis 2. Low-contact services can be classified into distinct groups based on the
relative importance allocated to operational (cost, quality, delivery, flexibility), market
and financial objectives.
Operations strategy, defined as the collective pattern of decision-making, is reflected by
a firms structural, infrastructural decisions and competitive priorities (Anderson et al., 1989;
Vickery et al), 1993; Boyer et al., 1996.. Development of a coherent operations strategy
includes translating chosen operational objectives into specific competitive priorities and
ensuring that each member of an organization understands them with a reasonable amount of
certainty. Although competitive priorities for various types of manufacturing operations have
been studied in numerous studies, relatively nothing has been done to identify and to explore
the relationship between competitive priorities and other operational issues in low-contact
services.
Building on past work in operations strategy, we have conceptualized competitive
priorities in low-contact services as specific policies/actions which management can emphasize
to achieve the chosen operational objectives. In other words, the chosen objectives
subsequently lead to specific competitive priorities. For example, if a companys main
operational objective is to improve service quality, then it would tend to prioritize the
determinants of service quality (such as reliability, tangibles, responsiveness, etc.). Similarly, if a
firms main operational objective is to improve flexibility, then they would tend to prioritize the
determinants of flexibility, such as variety, and volume flexibility. In other words, differences in
operations objectives should determine the relative weight assigned to different competitive
priorities.
Hypothesis 3. Low-contact service groups differ from each other in terms of their
competitive priorities.
A number of recent articles in operations strategy literature have demonstrated the link
between operational competitive priorities and various performance measures. For example, in
a recent study, Smith and Reece (1999) developed a causal model linking various service
strategies, productivity and business performance measures. Similarly, Bozarth and Edwards
(1997) demonstrated the link between market focus, manufacturing strategy, and performance
at the plant level. In another recent study, Pullman and Moore (1999) developed an optimal
service design approach which was based on customer preferences and operational
characteristics and linked with market performance. In early conceptual work, both Davidow
and Uttal (1989) and Heskett (1987) also strongly advocated the strong link between service
strategy and performance.
Although the link between service operations strategy, priorities, and performance has
been studied recently (e.g. Smith and Reece, 1999), there has been no systematic research in
exploring the differences between performance measures of different service groups. Building
on the past work of Boyer et al. (1996) and Miller and Roth (1994) in manufacturing industries,

Fig. 1. Conceptual framework and analysis methodology.

we propose that firms in different service clusters cannot not have similar performance
because their objectives and corresponding competitive priorities are not the same. Most of
the articles cited above measure quality, cost, delivery and flexibility performance. We have
chosen to add financial and market performance as suggested by a number of recent articles
(Kordupleski et al., 1993; Karmarkar and Pitbladdo, 1995; Rust et al., 1995; Pullman and Moore,
1999). Therefore:
Hypothesis 4. Low-contact service groups differ from each other in terms of their
operational (quality, cost, delivery, flexibility), market, and financial performance
measures.
The conceptual framework behind our work is summarized in Fig. 1. The broader
operations strategy construct is subdivided into objectives and competitive priorities. As
hypothesized earlier, we expect that low-contact services can be classified in subgroups based
on their objectives (Hypotheses 1 and 2) and will differ from each other in terms of their
competitive priorities (Hypothesis 3). We also hypothesized that business performance for
service clusters will differ from each other (Hypothesis 4).
Research Methods
Data Collection
Empirical data for this study were collected from the operations managers of fastfood
and automotive repair establishments in a large metropolitan area located in the western
United States. We chose to study these two industries because they represent services with

minimum customer contact and relatively low customization and therefore can be considered
prototype low-contact services (e.g. Schmen- ner 1986; Kellogg and Nie 1995). First, informal
interviews with five managers in each of the two industries were conducted followed by a pilot
study data collection from 10 more managers of each industry. The survey instrument was
updated and refined after the pilot study.
Finally, 125 fastfood and 175 auto repair establishments were randomly selected from
the local telephone directory, representing half of the local population of each service type. The
survey instrument and a forwarding letter from the lead researcher were hand-delivered to the
manager of each selected service establishment. Approximately two-thirds of the managers
agreed to respond to the survey instrument immediately. The rest either refused to participate
in the study (primarily because of time constraints) or asked the research assistants to return
later. A total of 251 surveys were returned, with the effective response rate of 83.67%. It
should be noted that the response rate for this study was considerably higher than that of
typical mail surveys because we personally contacted the managers (the response rates are
generally less than 40% for mail surveys).
Survey Instrument
The questionnaire contained four broad types of questions. The first section asked the
managers to rate the operational objectives of their establishments on a seven-point scale (1 =
not important; 4 = average importance; 7 = most important). The second section contained a
series of questions measuring competitive priorities on seven-point scale. The third section
asked the managers to rate their relative quality, cost, delivery, flexibility, market, and financial
performance, also on seven-point scale. Section four contained standard demographic
questions (age, work experience, gender, and education level).
The sections on operational objectives and performance each contained seven
questions related to financial, market, cost, delivery, product quality, service quality, and
flexibility. As mentioned earlier, building on recent publications, and based on qualitative data
collection from managers, we decided to add two questions related to financial and market
performance. The managers identified both financial and market performance as valid and
important operational objectives and performance measures. Other recent studies have also
used sales and market share growth as performance measures (Miller and Roth, 1994; Boyer et
al., 1996).
The competitive priorities were measured by 40 items generated from a list of questions
used in previous studies (e.g. Vickery et al., 1993; Miller and Roth, 1994). These questions
exploded product quality, service quality, cost, delivery, and flexibility objectives into their
primary determinants. For example, product quality can be achieved by enhancing one or more
of the following determinants (Garvin, 1987): performance, features, conformance, reliability,
durability, serviceability, aesthetics, or perceived quality. Similarly service quality can be
enhanced by prioritizing one or more of the following determinates identified by Parasuraman

et al. (1985): reliability, responsiveness, competence, access, courtesy, communication,

credibility, security, understanding/ knowing the customer, and tangibles. Similarly, flexibility
can be achieved by increasing the product/ service mix and/or by new product/service
development efforts. Multiple items were constructed (similar to the 22-item SERVQUAL
instrument) to measure each construct. The results section of this paper includes a list of items,
which is consistent with Miller and Roth (1994), and a series of articles on operations strategy
published by Vickery et al. (1993, 1997).
Data Analysis
The data analysis for this study involved the following steps. To test Hypothesis 1, we
used hierarchical cluster analysis on operational objectives as perceived by the managers.
Second, we examined the taxonomy by testing Hypotheses 2 and 3. Specifically, we
demonstrate that competitive priorities for the identified service factory groups were different
from each other using one-way ANOVA on competitive priority factors (since the competitive
priorities were measured by 40 items, we first used exploratory factor analysis to identify the
underlying factors). Next, we used discriminant analysis on competitive priorities to
demonstrate the effectiveness of the identified service factory classification scheme. Finally, we
used one-way ANOVA to test if performances for the identified service factory groups were
different from each other.
Results and Analysis
Respondents Profile
Table 1 presents the summarized background information about the respondents. The
average age for the respondents was 33.7 years; approximately 82% was male; average work
experience in the current firm was 7 years; and average additional work experience was 7.5
years. Approximately two-thirds of the respondents was educated beyond the high school
degree, but slightly less that 10% had a four-year college degree. Given the nature of lowcontact services and the relatively low wage structure, the above demographics about
education level should not be surprising. There are slight differences between the demographic
profiles of the respondents from the fastfood and the auto repair industries. On average, the
auto repair managers were slightly older (35 vs. 31 years), had more work experience, and were
mostly male (over 90% of the respondents).
Service Clusters
As mentioned earlier, low-contact services are often classified within a single category
(e.g. Chase, 1978). We also mentioned that there is no apparent agreement on how service
factories should prioritize their operational objectives. To explore the above issues and test
Hypothesis 1, we conducted a hierarchical cluster analysis using Wards method. Similar
approaches have been used in the recent operations management articles. For example, Miller
and Roth (1994) used such an approach to develop a taxonomy of manufacturing strategies.

Similarly, Boyer et al. (1996) identified the patterns of investment in advanced manufacturing
technologies using hierarchical cluster analysis. However, to our knowledge, this approach has
not been used to develop any service taxonomies.
As mentioned by Boyer et al. (1996) and Miller and Roth (1994), the primary challenge
associated with cluster analysis methodology is the issue of determining the appropriate
number of clusters. Boyer et al. (1996) recommend making a balanced choice between
parsimony (few clusters) and accuracy. Along these lines, Lehmann (1979) recommends that
the final number of clusters should be between n/30 and n/60, where n represents the sample
size. After the identification of the clusters, a one-way ANOVA is conducted to assess the
differences across the groups. Scheffes pairwise comparison procedure is used to test for
differences between individual pairs of groups if one-way ANOVA results are statistically
significant.
Table 2 presents the summarized results of the cluster analysis performed on the seven
operations objectives described earlier. We chose to stop further classification after developing
a five-cluster model because the sample size for one cluster dropped to single digit. Each group
in the five-cluster model presented in Table 2 represents an approach towards setting up broad
operational objectives. One-way ANOVA results for each operations objective were statistically
significant at p = 0.05 (to ensure consistently high statistical power level, p = 0.05 was used for
all the analyses presented in this paper as recommended by Verma and Goodale, 1995).
Additionally, the follow up Scheffes pairwise comparison results demonstrated that operations
objectives for each cluster were different from, at least, two other identified clusters. Together,
these results supported Hypothesis 1, which states that low-contact services can be classified
according to their operations objectives.
Approximately 20% of the firms was classified in Cluster 1 which we have labeled as
Financial Gain Seekers. For this group of low-contact services, financial gains seem to be the
most important objective, followed by service quality enhancement and cost reduction. Market

share gain and product quality improvement scores are also high. However, delivery and
flexibility scores were very low for this group. Hence, it can be concluded that the focus of
Cluster 1 firms was on enhancing their monetary position.
Cluster 2 firms (High Product-Service Quality Seekers), on the other hand, prioritized
service quality and product quality improvement. The relative scores for financial and market
share objectives were much lower than those of Financial Gain Seekers. Approximately 12% of
service factories fell in this category. It is also interesting to note that while High ProductService Quality Seekers do not emphasize financial and market objectives, cost reduction was
identified as the third most important objective. The relative magnitudes for delivery (4.38) and
flexibility (4.34) objectives were similar in importance to financial (4.66) and market share
(4.24) gain.
Twenty percent of firms was classified in Cluster 3 (Multiple Goals Seekers). These firms
gave very high scores (5.85 or higher) to all seven objectives. Therefore, it can be concluded
that Cluster 3 firms wished to achieve multiple (or all) objectives simultaneously and they did
not have a clearly defined operational priority.
Cluster 4 (High Service Quality Seekers) contained the largest number of firms (38%).
The most important operations objective was service quality followed by financial gain. Relative
scores for other objectives were also high compared to Financial Gain Seekers and High
Product-Service Quality Seekers, but were lower than Multiple Goal Seeker firms. Approximately
10% of firms fell in Cluster 5 (Market-Financial Gain Seekers) and they seemed to emphasize
financial and market share gain over the other operations objectives.
A cross-tabulation of cluster membership and industry type is included in Table 2 to
demonstrate that the fastfood and auto repair respondents are distributed throughout the five
clusters. The fastfood firms are almost evenly distributed in Clusters 1-4 (25.7%, 20.6%, 20.6%,
24.7%), whereas 47.2% of auto repair firms was classified as High Service Quality Seekers
(Cluster 4). These results further support our research objectives that service firms should not
be classified solely on the basis of industry type.
The cluster analysis results presented above clearly illustrate that the five groups
emphasized operational objectives differently and therefore support Hypotheses 1 and 2.
Therefore, we continue with the data analyses to test Hypotheses 3 and 4 and to demonstrate
the link between objectives, competitive priorities, and performance.
Competitive Priorities
Scale Development
The survey instrument contained 40 items related to various competitive priorities
(Vickrey et al., 1993, 1997; Miller and Roth, 1994). These competitive priority measures provide
finer-grained, more specific information than the objectives measures in Section 4.2. However,
several of these items might represent identical or similar constructs. Additionally, underlying

competitive priority dimensions have not been specifically identified for the low-contact
services. Therefore, we used Principle Components Analysis (exploratory factor analysis) to
develop reliable multiple-item measures for each of the underlying theoretical constructs
(Johnson and Wichern, 1988; Hair et al., 1998).
Eight eigenvalues exceeded the generally accepted cutoff value of 1.0 and were
therefore retained in the further data analysis. It should also be noted that the eigenvalues for
9th, 10th and 11th factors not retained in the analyses were 0.88, 0.80, and 0.75, which were
much lower than the cutoff point value of 1.0. Together, the eight retained factors explained
approximately 58% of the variance in the data. In order to increase the interpretability, a
Varimax rotation was performed on the identified principle components. Items were then
assigned to the factor on which they had the highest loadings. Only items, which had loadings
of at least 0.4 on at least one factor, were retained in the analysis. We also eliminated the items
that loaded on multiple factors. Using the above guidelines, a total of 36 items were retained in
the analysis as measures for eight competitive priority dimensions. Table 3 presents the
Varimax rotated principle components analysis results. For the sake of clarity, rotated factor
scores lower than 0.4 are not shown in Table 4.
We have labeled each of the eight factors shown in Table 3 according to the items,
which loaded on that latent competitive priority dimension. The customer-focused employee is
comprised of eight items related to employee knowledge/skills, trustworthiness, promptness
and the manner in which they provide service to the customers. The second factor labeled as
service definition is comprised of seven items, all of which try to define the service for the
customers. The variety flexibility factor measures the breadth of product and service package
delivered to the consumers. Four items related to reduction of operating cost loaded on the
fourth factor. Similarly, four other items related to delivery performance loaded on the fifth
factor. We have labeled the sixth factor as delivery flexibility and it measures the firm's ability
to provide the service when/how the customer wants. The final two factors are tangibles and
convenience and are comprised of two items each.
Scale Reliability Assessment
Since the competitive priority scales developed via factor analysis are new for lowcontact services and have not been validated in previous studies, we must take care to assess
the inter-item reliability of the items comprising each scale (Flynn et al., 1990). Cronbach's
coefficient alpha was used to assess inter-item reliability, with alpha values of 0.70 or higher
considered to indicate acceptable reliability for established scales and 0.60 being acceptable for
new scales (Nunnally, 1978; Churchill, 1979). Therefore, we concluded that the competitive
priority scales are comprised of reliable items.
Hypothesis 3 states that competitive priorities for low-contact services are based on their
operations objectives. Therefore, we expect that service clusters, which differ from each other
in terms of operations objectives, should exhibit different patterns of competitive

Competitive Priorities for Service Clusters

priorities. We tested the above hypothesis by two sets of statistical techniques. First, we used
one-way ANOVA followed by Scheffe's pairwise comparisons to assess if the average scores are
indeed different for each cluster for each identified competitive priorities factor (Table 4). We
further tested the effectiveness of the service classification by conducting a discriminant
analysis on the competitive priority factors. The discriminant analysis tested if the patterns of
competitive priorities can correctly predict the original groups of the services, which were
based on operations objectives.
One-way ANOVA results of competitive priorities dimensions are summarized in Table 4.
The p-values for the F-tests were statistically significant at the 5% level for each of the eight
competitive priorities dimensions. Furthermore, the follow up Scheffe's pairwise tests
demonstrated that the average scores for most of the competitive priority dimensions were
different for three or more clusters. These results support Hypothesis 3 and illustrate that,
indeed, competitive priorities are dependent on operations objectives in low-contact services.
It is interesting to note that delivery flexibility and customer-focused employees were
among the top two competitive priorities for all of the five service clusters. Additionally, the
service definition, variety flexibility, and cost reduction were not among the top three priorities
for any cluster. Other than the above similarities, the mean scores and their relative ranks for
different priorities were completely different for the clusters shown in Table 4. Therefore, we
concluded that competitive priorities are indeed based on operations objectives.
Next, a discriminant model was developed based on the eight competitive priority
dimensions (independent variables) and by assuming that services were originally classified into
five clusters (dependent variable). Miller and Roth (1994) used a similar approach to test the
effectiveness of their taxonomy of manufacturing strategies. Table 5A shows the coefficients
for each of the two discriminant functions, as well as Wilk's lambda and the mean scores for
each of the five clusters (Hair et al., 1998).
As shown in Table 5A, both the discriminant functions were statistically significant based upon
Wilks lambda (p - 0.05). The coefficient for the customer-focused employees was the highest
and substantially higher than the other coefficients in discriminant function 1. On the other
hand, discriminant function 2 was heavily weighted by the following four priorities: tangibles,
convenience, delivery performance, and cost reduction. In addition, the group centroids
(cluster means) for each of the five service factory clusters differed substantially. Discriminant
function scores were standardized so that the entire sample had a mean of 0.00 and a standard
deviation of 1.00. This allowed easy comparisons between the groups being classified. For
example, the mean for Cluster 1 was in the third quadrant (-0.21, -0.48); Cluster 2 mean was in
the second quadrant (-1.16, +0.51); Cluster 3 mean was in the first quadrant (+ 1.06, +0.23);
Cluster 4 mean was close to the origin in the fourth quadrant ( + 0.169, 10.002); and Cluster 5
mean (-0.974, -0.004) was in third quadrant close to the axes of the first discriminant function.
Fig. 2 shows the relative position of cluster means along the two discriminant axes.

Although it is extremely important to have statistically significant functions, it is also

very important that the discriminant functions perform well in classifying service factories into
their original groups for calibration and validation samples.
Table 5B presents the classification results based on the two discriminant functions
shown in Table 5A for calibration sample. The rows of Table 5B show the actual classification
(based on cluster analysis performed on operations objectives), while the columns show the
predicted group based on the two discriminant functions. The companies in the main diagonal
have correct predictions (shown in bold), while the other cells represent the misclassified firms.
If each cluster is comprised of equal number of responses, then without any additional
prior information, one can randomly assign the services into the five groups with an expected
probability of making a correct decision to be 20%. In our case, the cluster sizes vary between

23 and 91; therefore, a proportional chance criterion can be used to assess the predictive
accuracy of a discriminant model (Morrison, 1969; Perreault et al., 1979; Huberty, 1984; Hair et
al., 1998). The proportional chance criterion for a discriminant model can be defined as
=1,( )2 where represents the expected probability that a randomly chosen observation
will be classified in group i. The expected probabilities ( ) can be calculated by simply taking a
ratio of number of observations/cluster with respect to total sample size. Since a total of 239
observations were retained in the discriminant analysis, the expected probabilities for the five
clusters are 20.5%, 12.1%, 19.7%, 38.1% and 9.6%, respectively. Therefore, the proportional
chance criterion becomes 25%. Hair et al. (1998) recommend that classification accuracy should
be at least 25% higher than the proportional chance criterion for a good discriminant model
(1.25 X 25% = 31.25%). As shown in Table 5B, the classification accuracy for the estimated
model was 50.7%, which is considerably higher than the suggested guideline of Hair et al.
(1998). Note that the classification accuracy of the estimated discriminant model is also higher
than the maximum chance criterion (probability of being in the group with the largest sample
size = 38% chance of being in Cluster 4) (Hair et al., 1998).

The predictive accuracy of a discriminant model can be further verified by 2 statistics

(df = 1) known as Presss = [ ()]2 /[( 1)] where N represents total sample size, n
represents number of observations correctly classified, and K represents number of groups. In
our case, Presss Q statistics was found to be 82.6%, which is statistically significant at = 0.05
and therefore supports the predictive accuracy achieved by the estimated discriminant model.
It is common practice to further validate the estimated discriminant models by either
using a split sample (e.g. holdout sample) or a cross-validation technique (e.g. U-Method or
Jackknifing). Although both approaches have been used in past research, leading statisticians

favor cross-validation techniques over a split sample approach (e.g. Perreault et al., 1979; Hair
et al., 1998) because cross-validation methods repeat the procedure multiple times. In crossvalidation, discriminant models are estimated by leaving one observation out and then the
estimated models are used to predict the membership of the unselected observation. This
process is repeated for each observation in the data set. Both U-Method and Jackknifing are
based on the same principle. The primary difference is that U-Method focuses on classification
accuracy, whereas Jackknifing focuses on the stability of discriminant functions. In our study,
the purpose of discriminant analysis was to demonstrate the accuracy of classification and
therefore, we used the U-Method to cross-validate the results. The results presented in Table
5C show that cross-validated cases are classified fairly accurately and exceed the proportional
chance criterion, maximum chance criterion and are statistically significant based on Presss Q
statistics.
Relative Business Performance
Since the operations objectives and competitive priorities are different for each of the
five clusters, one would expect that the relative quality, cost, delivery, flexibility, market and
financial performance of each cluster will be different. We proposed earlier (Hypothesis 3) that
operation objectives determine competitive priorities and therefore should impact the
performance of the service factories.
During the pilot data collection efforts, we realized that it would be extremely difficult
to get accurate objective performance data from the operations managers. First, because of the
confidential nature of this information, most managers contacted during the pilot study had
simply refused to answer either the performance questions and/or the whole questionnaire.
Second, because the individual service establishments are often part of large corporations, the
performance data are often not available at the individual branch level. Therefore, the only
data we could collect were the subjective measure of relative performance. On seven-point
scales, managers evaluated their own performance with respect to close competitors. Although
subjective, such measures are common in operations strategy research because of the difficulty
in obtaining the objective performance measures. For example, Boyer et al. (1996) measured
sales growth, return on scales, and earnings growth on similar seven-point scales in a study of
the investment patterns in advanced manufacturing technologies.
Table 6 presents the summarized performance results for each of the five service
clusters. We conducted a series of one-way ANOVAs to test if the relative performances were
different for each of the service factory groups. A-ratios for the seven performance measures
(financial, market, cost, product quality, service quality, delivery, and flexibility) were
statistically significant at the 5% level. Furthermore, the follow up Scheffes pairwise
comparisons showed that mean scores for a few clusters were different from each. Recognizing
the limited information obtained from the performance data, we concluded that there is
support for Hypothesis 3, which states that performance in service factories is based on

operations objectives and competitive priorities.

Conclusions
The objective of this research was to empirically assess the differences in operations
objectives, competitive priorities and performance among the clusters of low-contact services.
Data collected from the managers of two industries provide several interesting insights about
the management of service factories.
Perhaps, the most important result presented in this paper is the fact that low-contact
services appear to be comprised of multiple groups, which differ from each other in terms of
their operational objectives, competitive priorities and performance. Based on these results, we
conclude that it will be narve to consider all services within the same theoretical group in
service classification schemes to be similar to each other. These results support the notion that
service management researchers should move beyond the primary classification research and
should now start testing the theories and concepts proposed in the past research. The results
also suggest that practicing managers should not try to emulate other firms just because they
are from the same industry. It is possible that two firms from same industry (e.g. fastfood)
belong to different clusters, whereas two other firms from dissimilar industries (e.g. fastfood
and auto repair) belong to the same cluster based on their objectives and corresponding
competitive priorities. Therefore, the practicing managers should pay close attention to the
characteristics of individual firms rather than making assumptions about the whole industry.
Identification of the competitive priority dimensions is another important finding of this
study. The exploratory factor analysis results demonstrate that competitive priorities in lowcontact services are comprised of eight factors. The high factor loading and high reliability
scores for the identified factors provide validity for the results presented earlier in this paper.
The high scores also give service researchers confidence in using these scales in future
researches for additional analysis and/or refinement.
The results of the discriminant analysis of competitive priorities serve to further validate
the descriptive power of the cluster analysis performed on operations objectives. Even though
the discriminant functions could only classify about 50% of the responses correctly, we consider
the results to be very encouraging. The reader should note that these results are still over two
times (25% vs. 50%) better than random classification (proportional chance criterion). In
addition, it should also be noted that we were trying to classify firms, which have always been
considered to be one homogeneous group because they contain many similar attributes.
Therefore, the classification task was inherently very difficult. Finally, we demonstrated that
performance measures in different clusters are different from each other.
Although very encouraging, we consider our study to be only exploratory in nature.
There are a number of limitations of our study, which should be addressed in future work. For
example, our study was only based on two industries fastfood mid auto repair. Future
studies should try to expand the analysis to a larger number of low-contact services and data

should be collected from a wider geographical region to insure generalizable results. Another
limitation of this work is that we assumed that all the fastfood and auto repair establishments
in the sample represent low-contact services. We did not measure customer contact directly.
Future work should undertake some measure of customer contact and perhaps test specific
propositions about objectives and competitive priorities assuming that customer contact might
vary from firm to firm.
Overall, we believe that we have managed to address a number of relevant and
important issues, which should be of interest to service management researchers and
practitioners. We hope that other researchers will undertake similar research projects and
attempt to test and validate existing service management theories. The role of empirical
analysis is to test the extent to which theories fully represent reality and to suggest
shortcomings, which lead to further research and refinement. Toward that end, further
research should seek to add to the current findings by examining additional quantitative
measures in an effort to develop a more accurate service classification model.
Acknowledge
The authors would like to thank the special issue editors, Chris McDermott, Ken Boyer,
anonymous associate editor, and three anonymous reviews for providing many valuable
comments during the review process.
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